The industry debate over cross-selling is just getting started.
When quarterly earnings season kicks off next week, expect banks to get peppered with questions about their retail sales strategies.
The revelation last month that Wells Fargo branch employees created roughly 2 million phony accounts to meet sales goals has put a spotlight on incentive pay and managing to metrics. Amid intense public backlash, Wells stopped providing bonuses to its branch employees last week.
Now other banks will take a turn in the hot seat. During conference calls with analysts, executives will likely be asked to provide details about how they compensate branch employees for meeting sales targets.
JPMorgan Chase, Wells Fargo, Citigroup and PNC Financial Services Group kick off third-quarter earnings season next Friday.
Cross-selling has become a "four-letter word" over the past few weeks, said Gerard Cassidy, an analyst with RBC Capital Markets.
The Wells scandal has sparked conversation in the industry about when, exactly, a bank crosses the line by selling products such as credit cards. While banks understandably want customers to use multiple products, the high-pressure sales culture at Wells has been blamed for creating an environment that was ripe for fraud.
"A much brighter light will be shone on how banks are incentivizing" retail employees, said Scott Siefers, an analyst with Sandler O'Neill.
But there will be plenty else to talk about.
With low rates continuing to weigh on revenue, analysts will be closely watching a number of key statistics: net interest margins, loan growth and expenses.
Another hot topic will be capital markets. In their second-quarter reports big banks such as JPMorgan Chase reported stronger-than-expected trading results, due in part to the fallout from Brexit. Expectations for this quarter are mixed.
Here's an overview of what to watch for.
Commercial Loan Woes
Business lending — a key line of business for regional banks — is expected to be a drag on earnings.
During an investor conference last month, the heads of a number of major regional banks — including the $217 billion-asset BB&T and the $141 billion-asset Fifth Third Bancorp — said they expected to report weak growth in commercial and industrial loans.
Big banks may also feel the pinch. For instance, Bank of America is expected to grow C&I loans by 4%, compared to 7% in the prior quarter, according to Keefe, Bruyette & Woods.
It's a shift from recent quarters, when C&I lending drove earnings higher at big banks. Midsize businesses, in particular, remain reluctant to use their credit lines, amid uncertainty about long-term economic growth.
"We will hear about a deceleration in C&I," particularly at large and regional banks, Cassidy said.
Slower business lending will be a drag on loan books overall.
Growth in total loans is expected to be at its lowest level in six years, increasing by only 4% from the prior quarter, Brian Klock, an analyst with KBW, said in an Oct. 4 note to clients.
BB&T last month lowered its guidance for third-quarter loan growth to 1% for the remainder of the year from prior forecasts of as high as 3%. Chief Executive Kelly King described the market for commercial lending as "challenging."
Fifth Third CEO Greg Carmichael also told investors that the company was experiencing weak commercial loan growth.
Lower Energy Reserves
The credit outlook for oil lenders is looking a bit brighter.
Banks are expected to release a portion of their energy reserves, as the price of oil stabilizes around $50 per barrel.
It would be a welcome change. Earlier this year, when markets crashed and oil prices plunged below $30 per barrel, regulators pushed energy lenders to adopt more aggressive risk ratings and boost their reserves.
Energy reserves reached nearly 10% at several regional lenders. But in their third-quarter reports, banks are expected to show a steady lowering of their oil and gas reserves, as they continue to work with distressed borrowers and charge off problem loans.
"There is a sense that maybe those reserves are a little too robust," Siefers said.
The $21 billion-asset Texas Capital Bancshares and the $29 billion-asset Associated Banc-Corp are two of several banks that will likely release reserves, according to KBW.
It's just one more way that banks are starting to put the recent oil crash behind them.
During the second quarter, the industry scaled back on oil lending. Regional banks such as Comerica and the $125 billion-asset Regions slashed their exposure by 12% and 11%, respectively.
All that said, bankers aren't out of the woods yet. For instance, JPMorgan said in July that it boosted its reserve levels because of the downgrade of one large borrower.
"Although the oil and gas sector remains stressed and reserves will continue to be idiosyncratic, overall trends have been somewhat positive," JPMorgan Chief Financial Officer Marianne Lake told investors in July.
Mortgage Banking Boost
Low rates are expected to be a boon to mortgage banking fees.
Banks across the industry are expected to see gains in their mortgage businesses, as historically low rates encourage borrowers to refinance and buy new homes, Siefers said.
Mortgage fees are expected to increase compared with both last year and the prior quarter.
Interest rates on fixed-rate mortgages sunk to historic lows during the third quarter. The average rate on a 30-year fixed mortgage was 3.42% as of Sep. 29, compared with 3.85% a year earlier, according to Freddie Mac.
Purchase applications during the quarter also reached their highest level since December 2007.
An increase will likely benefit regional banks, such as the $123 billion-asset M&T Bancorp and the $195 billion-asset SunTrust Banks, said Marty Mosby, an analyst with Vining Sparks, in an Oct. 3 note to clients.
Continued Margin Squeeze
Tighter margins will continue to crimp profits.
Net interest margins are expected to fall by an average of 1 basis point from a year earlier and 2 basis points from the prior quarter, according to Cassidy.
The slow and steady decline in margins from quarter to quarter has eroded profitability over time. Margins for the entire industry have fallen 76 basis points from the first quarter of 2010, to 3.08% as of June 30, according to BankRegData.com.
Expect the pain to continue, as banks grapple with a flattening yield curve, according to industry analysts.
The recent rise in the London interbank offered rate, or Libor, has also helped.
The three-month Libor has continued to edge upward during the third quarter, reaching 0.85% as of Sep. 27, compared with about 0.65% at the beginning of July, according to the Federal Reserve Bank of St. Louis.
Still, the uptick in Libor is expected to be temporary — an offshoot associated with new money market rules set to take effect this month. And banks that aren't sensitive to the three-month Libor won't notice the blip anyway.
"The way I've characterized it is, it's better than nothing," Siefers said.
More Costs to Cut
Chipping away at costs will remain the primary way banks can boost earnings.
Within the past few months, Bank of America, Comerica and Fifth Third have all announced new multiyear plans to trim expenses and increase profits.
Analysts will be looking for details on how those plans are progressing — and whether other banks plan to eliminate staff or branches in the coming months.
"The problem with expenses going up in a rough revenue environment is that it's much more difficult to paint a good cost story," Siefers said.
Still, splashy cost-cutting plans aside, banks may not report a decline in overall expenses. Some are reinvesting the cost savings into other projects, such as new technology or compliance systems.
Plus, after years of cutting staff and pinching pennies, many bankers are running out of easy options.
U.S. Bancorp CEO Richard Davis last month said at the $433 billion-asset bank's investor day that costs will continue to rise in the coming months. Expenses have increased recently due to a mix of compliance, technology and marketing.
But Davis — who is known for his spending discipline — urged investors to consider those costs as necessary for long-term growth.
"No money will be spent that's not considered an investment," Davis said.